Summary of LAO Findings and Recommendations on the 2011-12 Budget

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Last Updated
 Go Back  LAO Budget Forecast Governor's plan brings budget much closer to balance Provides information on the LAO's updated forecast of General Fund revenues and expenditures through 2015-16 based on our initial assessment of the Governor's May Revision policies and proposals. 5-25-11

Detailed Narrative

Our office's multiyear forecast of state General Fund revenues and expenditures under the Governor's May Revision proposals shows that the Governor's plan (1) balances the budget in 2011-12, (2) brings the state budget much closer to balance through at least 2015-16, and (3) leaves a potential budget problem to address after all of the Governor's major tax proposals expire on June 30, 2016.


Basis of Our Forecast. Our revenue forecast was discussed in our recent publication, Overview of the May Revision. We also have now completed our forecast of the Governor's expenditure proposals. Similar to the methodology underlying our May Revision budget forecasts in prior years, we made our own independent assessment of the Governor's proposals for each major General Fund program with the basic assumption that all of them were adopted by the Legislature.

In addition, unless the Governor has proposed an explicit change to statute or policy, we generally assume the continuation of current law and current policies. For example, for the state's university systems and the courts, current law (specifically, Section 11019.10 of the Government Code) prohibits automatic increases for inflation, and the Governor's proposals, so far as we know, do not adjust these policies. Accordingly, our forecasts for the university and court systems assume no future increases after 2011-12 consistent with this law.

Forecasting Is, By Its Nature, Imprecise. There are many uncertainties involved with budget forecasting. In any given year, revenues, for example, can be higher or lower by several billion dollars due to fluctuations in capital gains, wages, employment, personal income growth, and other economic factors. In our forecast model, this year, we have attempted to model the General Fund effects of the Governor's realignment proposal. There are many uncertainties concerning exactly how realignment would be implemented, and these also could affect forecasting outcomes in any given year by considerable amounts. In addition, much of our forecasting process was concluded before the U.S. Supreme Court's May 23, 2011 decision in Brown v. Plata, the prison population case. Accordingly, additional actions to comply with prison population orders also could affect forecasted expenditures in future fiscal years.

Forecast Discussion

Governor's Plan Balances Budget in 2011-12. In our forecast (summarized in Figure 1), the General Fund ends 2011-12 with a small reserve similar in size to that forecast by the Governor. Our slightly higher estimate of expenditures lead to a slightly lower reserve just under $1 billion. (Like the Governor, we assume that the state receives no General Fund benefit from enacted budget actions concerning Proposition 10 funds.)

Figure 1
LAO Forecast of Governor's May Revision Policies: Summary Information      
(General Fund, In Millions)            
  2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Revenues and Transfers $95,702 $93,720 $98,487 $102,578 $110,016 $114,337
Proposition 98 Minimum Guarantee (General Fund) 35,691 38,294 40,989 43,133 46,275 47,719
Non-Proposition 98 55,784 51,009 59,171 60,610 63,238 66,219
  Expenditures ($91,475) ($89,303) ($100,160) ($103,743) ($109,513) ($113,938)
End-of-Year Reserve (2010-11 and 2011-12) -$3,493 $924
Operating Surplus/(Deficit)a 4,227 4,417 -1,673 -1,165 503 399
a Forecasted General Fund revenues and transfers for the fiscal year less forecasted  General Fund
   expenditures. Incoming balances or fund balance deficits are excluded.

Later Years Much Closer to Balance Under Governor's Plan. As shown in Figure 1, our forecast for later fiscal years is for an operating deficit between $1 billion and $2 billion per year in 2012-13 and 2013-14 and then for modest operating surpluses in 2014-15 and 2015-16. The administration's multiyear forecast, by contrast, shows a modest surplus in each year through 2014-15. As we discussed in the Overview of the May Revision, General Fund revenues in our forecast grow more slowly than they do in the administration's forecast. In later fiscal years, however, our forecast also indicates slower growth in General Fund expenditures. Accordingly, we still project the Governor's proposal will be roughly in balance in the last two years of our multiyear forecast.

Significant General Fund Commitment After 2015-16 Under Realignment. Under the Governor's realignment proposal to shift responsibilities for various programs from the state to local governments, the local entities would receive funding from sales and use taxes and vehicle license fee revenues that would be in effect for five years subject to voter approval. After the expiration of these taxes in 2015-16, under the administration's plan, the state would continue to provide a comparable level of support from the General Fund for local entities providing realigned services. Given that our forecast indicates the Governor's plan would just barely balance in 2015-16, this suggests that the state could once again face an annual budget shortfall of a few billion dollars beginning in 2016-17. Accordingly, if the Governor's plan is adopted, the Legislature and the administration would need to consider the implications of the state's funding commitments for the state budget in 2016-17 and later years.